AT&T Inc. (T) declared its second-quarter earnings of 61 cents per share, surpassing the Zacks Consensus Estimate of 57 cents. The results were declared before the market opened on July 22, 2010. Earnings increased 13% year over year, excluding the one-time gain from the Telmex Internacional (TII) transaction.

Net income in the quarter jumped 25.9% year over year to $4 billion, driven by continued growth in mobile broadband, gains in IP-based and strategic business services and cost-cutting measures.

Revenue inched up 0.6% year over year to $30.8 billion, approximately in line with the Zacks Consensus Estimate. The increase in revenue was driven by strong growth in Wireless revenue.

Segment Results

Wireless

The momentum for Apple’s (AAPL) iPhone continues, with highest-ever new activations of 3.2 million (approximately 27% represented by new customers) in the quarter. Post-paid 3G wireless devices also registered solid quarterly net additions with 2.9 million new activations to reach 29.7 million.

AT&T registered a net gain of 1.6 million wireless subscribers in the second quarter to reach 90.1 million total subscribers in service, up 14.2% year over year, attributable to strong iPhone activations. This represents an all-time high quarterly net addition in the company’s history. Retail post-paid additions in the quarter totaled 496,000 million (32% of total net additions).

Total Wireless revenue climbed 10.3% year over year to $13.2 billion owing to reduced churn, strong data network and continued growth of subscribers. Wireless data revenue increased 27.2% year over year to $936 million, driven by strong handset sales and greater usage of AT&T’s mobile broadband network. Both total churn (customer switch) and post-paid churn improved for the sixth consecutive quarter and achieved record lows. Total churn was 1.29% compared with 1.48% in the year-ago quarter, while post-paid churn was 1.01% compared with 1.07% in the year-ago quarter.

Post-paid ARPU (average revenue per user) was $62.63, up 3.4% year over year, driven by healthy data growth.

Wireline

Total U-verse TV subscribers reached 2.5 million in the quarter with a net addition of 209,000 customers (up 60% from the year-ago level), as well as continued high broadband and voice attach rates. AT&T U-verse revenues exceeded to $1 billion for the first time, which is more than twice the U-verse revenues in the year-ago quarter. AT&T’s total video subscribers, which includes the company’s U-verse and bundled satellite customers, reached 4.6 million (representing 17.9% of households served).

Wireline revenues recorded the smallest year-over-year decline in the last five quarters, at 3.7%. Revenues of $15.4 billion in the second quarter was driven by improved consumer and business customer trends.

However, total consumer connections plunged to 44.3 million from 46.3 million in the year-ago quarter, primarily due to a drop in traditional voice access lines, partially offset by increases in U-verse TV and VoIP (Voice over Internet Protocol) connections. AT&T U-verse Voice connections increased by 183,000 in the quarter. The company added 404,000 customers from the year-ago quarter to reach 16 million total broadband connections.

Cash Flow

AT&T generated $7.9 billion cash from operations in the second quarter compared with $8.6 billion in the year-ago quarter. Free cash flow (cash from operations minus capital expenditures) in the second quarter was $3.8 billion compared with $3.7 billion in the year-ago quarter.

Outlook

AT&T is confident of delivering strong earnings growth in 2010, with high operating margins and free cash flow, attributable to improved revenue trends and solid execution.

Our Analysis

AT&T is pursuing a number of strategies, including aggressive promotion of bundled services (voice, video and Internet) to protect its markets from cable operators and other alternative services. Healthy growth from its U-verse video services is helping AT&T to counter increasing competition in the traditional wireline business.

We remain encouraged by AT&T’s ongoing efforts to upgrade its wireless network and increase its acquisition initiatives to expand customer base and coverage zones as the U.S. subscriber population reaches maturity.

Although we believe operational synergies will be realized in the future, we maintain a cautious approach due to persistent erosion in wireline voice customer base, signs of a slowdown in post-paid wireless business as well as the ongoing aggressive pricing and promotional war with Verizon Communication (VZ).

We are currently maintaining our Neutral recommendation on AT&T with the Zacks #3 Rank (Hold).

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